Countries often run up deficits as they try to revive flailing economies, but reining in deficits during shaky fiscal times can be perilous, says Fletcher School economist Michael Klein.
The self-imposed “fiscal cliff” the U.S. is facing on Jan. 1, when taxes will rise and government spending will be sharply reduced (unless, of course, Congress reaches an agreement to rescue us from the precipice) may do more harm than good, says Klein, who served as chief economist in the U.S. Treasury’s Office of International Affairs last year. He points to rounds of tax increases in the midst of the Great Depression that sent the country spiraling again and to the austerity measures the British government imposed in 2010 that stalled economic recovery there.
Politics, not economics, brought us to this point, argues Klein, the William L. Clayton Professor of International Economic Affairs at The Fletcher School at Tufts. He says a large national deficit is not as dire as the political dysfunction in Washington.
With compromise in short supply in Congress, as Klein puts it, bridging the impasse about how to increase revenues and cut spending will be tough. But did we really need to be approaching the brink in the first place? Tufts Now asked Klein how we got to this point and whether we can avoid plunging off the cliff.
Tufts Now: Should be we concerned about reducing the deficit?
It’s standard that when countries go through a recession, their deficits get bigger. And in fact, that’s good for all of us, because it mitigates the extent of the economic downturn. If we don’t offset falling tax revenues with increased government spending and investment, the economy gets into an even worse situation. It’s true that when your deficit is larger, your national debt rises. Right now the U.S. debt-to-GDP (gross domestic product) ratio is just over 100 percent, meaning slightly more debt than income. This does affect the country’s financial rating, which can increase borrowing costs.
--Reprinted from TuftsNow
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